MN 10-Q _Q3 2014
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q 
_____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission file number: 001-35355
 _____________________________________________________________
MANNING & NAPIER, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Delaware
 
45-2609100
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
290 Woodcliff Drive
Fairport, New York
 
14450
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(585) 325-6880
_____________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 
Class
  
Outstanding at November 6, 2014
Class A common stock, $0.01 par value per share
  
13,705,419
Class B common stock, $0.01 par value per share
  
1,000
 




TABLE OF CONTENTS
 
 
 
Page
Part I
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
Item 1A.
Item 6.
 
 
 
 
In this Quarterly Report on Form 10-Q, “we”, “our”, “us”, the “Company”, “Manning & Napier” and the “Registrant” refers to Manning & Napier, Inc. and, unless the context otherwise requires, its consolidated direct and indirect subsidiaries and predecessors.
 
 


i

Table of Contents

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Manning & Napier, Inc.
Consolidated Statements of Financial Condition
(In thousands, except share data)
 
 
 
September 30, 2014
 
December 31, 2013
 
 
(unaudited)
 
 
Assets
 
 
 
 
Cash and cash equivalents
 
$
118,857

 
$
125,250

Accounts receivable
 
24,322

 
24,140

Accounts receivable—Manning & Napier Fund, Inc.
 
17,089

 
16,461

Due from broker
 
5,567

 
5,816

Investment securities, at fair value
 
25,782

 
21,321

Prepaid expenses and other assets
 
7,562

 
8,028

Total current assets
 
199,179

 
201,016

Property and equipment, net
 
6,650

 
5,424

Net deferred tax assets, non-current
 
43,839

 
46,164

Other long-term assets
 
1,618

 

Total assets
 
$
251,286

 
$
252,604

 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable
 
$
2,222

 
$
1,476

Accrued expenses and other liabilities
 
43,729

 
49,813

Deferred revenue
 
13,955

 
12,007

Total current liabilities
 
59,906

 
63,296

Other long-term liabilities
 
2,478

 
1,444

Amounts payable under tax receivable agreement, non-current
 
39,126

 
42,075

Total liabilities
 
101,510

 
106,815

Commitments and contingencies (Note 10)
 


 


Shareholders’ equity
 
 
 
 
Class A common stock, $0.01 par value; 300,000,000 shares authorized; 13,705,419 and 13,634,246 issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
137

 
136

Class B common stock, $0.01 par value; 2,000 shares authorized, 1,000 shares issued and outstanding at September 30, 2014 and December 31, 2013
 

 

Additional paid-in capital
 
213,070

 
208,988

Retained deficit
 
(45,905
)
 
(40,544
)
Accumulated other comprehensive income
 

 
(1
)
Total shareholders’ equity
 
167,302

 
168,579

Noncontrolling interests
 
(17,526
)
 
(22,790
)
Total shareholders’ equity and noncontrolling interests
 
149,776

 
145,789

Total liabilities, shareholders’ equity and noncontrolling interests
 
$
251,286

 
$
252,604

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Operations
(In thousands, except share data)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
 
Investment management services revenue
 
$
104,795

 
$
94,647

 
$
307,129

 
$
277,876

Expenses
 
 
 
 
 
 
 
 
Compensation and related costs
 
51,499

 
44,935

 
159,457

 
140,739

Distribution, servicing and custody expenses
 
19,921

 
17,459

 
58,325

 
49,869

Other operating costs
 
9,365

 
7,706

 
25,867

 
23,235

Total operating expenses
 
80,785

 
70,100

 
243,649

 
213,843

Operating income
 
24,010

 
24,547

 
63,480

 
64,033

Non-operating income (loss)
 
 
 
 
 
 
 
 
Interest expense
 
(14
)
 
(14
)
 
(21
)
 
(20
)
Interest and dividend income
 
144

 
100

 
553

 
234

Change in liability under tax receivable agreement
 
(65
)
 
(118
)
 
2,045

 
(118
)
Net (losses) gains on investments
 
(1,279
)
 
500

 
(446
)
 
452

Total non-operating income (loss)
 
(1,214
)
 
468

 
2,131

 
548

Income before provision for income taxes
 
22,796

 
25,015

 
65,611

 
64,581

Provision for income taxes
 
2,976

 
2,222

 
10,412

 
6,799

Net income attributable to controlling and noncontrolling interests
 
19,820

 
22,793

 
55,199

 
57,782

Less: net income attributable to noncontrolling interests
 
19,392

 
21,479

 
53,991

 
55,864

Net income attributable to Manning & Napier, Inc.
 
$
428

 
$
1,314

 
$
1,208

 
$
1,918

 
 
 
 
 
 
 
 
 
Net income per share available to Class A common stock
 
 
 
 
 
 
 
 
Basic
 
$
0.03

 
$
0.10

 
$
0.09

 
$
0.14

Diluted
 
$
0.03

 
$
0.10

 
$
0.09

 
$
0.14

Weighted average shares of Class A common stock outstanding
 
 
 
 
 
 
 
 
Basic
 
13,705,134

 
13,634,246

 
13,669,391

 
13,612,289

Diluted
 
13,930,020

 
13,690,641

 
13,822,402

 
13,673,499

Cash dividends declared per share of Class A common stock
 
$
0.16

 
$
0.16

 
$
0.48

 
$
0.48

The accompanying notes are an integral part of these consolidated financial statements.


2

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income attributable to controlling and noncontrolling interests
 
$
19,820

 
$
22,793

 
$
55,199

 
$
57,782

Reclassification adjustment for realized losses on investment securities included in net income
 

 

 
1

 

Comprehensive income
 
$
19,820

 
$
22,793

 
$
55,200

 
$
57,782

Less: Comprehensive income attributable to noncontrolling interests
 
19,392

 
21,479

 
$
53,992

 
$
55,864

Comprehensive income attributable to Manning & Napier, Inc.
 
$
428

 
$
1,314

 
$
1,208

 
$
1,918

The accompanying notes are an integral part of these consolidated financial statements.


3

Table of Contents

Manning & Napier, Inc.
Consolidated Statement of Shareholders’ Equity
(In thousands, except share data)
(Unaudited) 
 
 
 
Common Stock –  class A
 
Common Stock – class B
 
Additional
Paid in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive Income (Loss)
 
Non
Controlling
Interests
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Total
Balance—December 31, 2013
 
13,634,246

 
$
136

 
1,000

 
$

 
$
208,988

 
$
(40,544
)
 
$
(1
)
 
$
(22,790
)
 
$
145,789

Net income
 

 

 

 

 

 
1,208

 

 
53,991

 
55,199

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(80,602
)
 
(80,602
)
Net changes in unrealized investment securities gains or losses
 

 

 

 

 

 

 
1

 

 
1

Common stock issued under equity compensation plan
 
71,173

 
1

 

 

 
(1
)
 

 

 

 

Equity-based compensation
 

 

 

 

 
9,735

 

 

 
58,406

 
68,141

Dividends declared on Class A common stock - $0.48 per share
 

 

 

 

 

 
(6,569
)
 

 

 
(6,569
)
Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests (Note 4)
 

 

 

 

 
(5,652
)
 

 

 
(26,531
)
 
(32,183
)
Balance—September 30, 2014
 
13,705,419

 
$
137

 
1,000

 
$

 
$
213,070

 
$
(45,905
)
 
$

 
$
(17,526
)
 
$
149,776

The accompanying notes are an integral part of these consolidated financial statements.


4

Table of Contents

Manning & Napier, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
 
Nine months ended September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
Net income
 
$
55,199

 
$
57,782

Adjustment to reconcile net income to net cash provided by operating activities:
 
 
 
 
Equity-based compensation
 
68,141

 
63,762

Depreciation and amortization
 
1,643

 
1,419

Change in amounts payable under tax receivable agreement
 
(2,045
)
 
118

Net losses (gains) on investment securities
 
446

 
(452
)
Deferred income taxes
 
3,743

 
1,911

(Increase) decrease in operating assets and increase (decrease) in operating liabilities:
 
 
 
 
Accounts receivable
 
(100
)
 
287

Accounts receivable—Manning & Napier Fund, Inc.
 
(627
)
 
(948
)
Prepaid expenses and other assets
 
507

 
1,618

Accounts payable
 
746

 
(334
)
Accrued expenses and other liabilities
 
(7,532
)
 
(7,681
)
Deferred revenue
 
1,948

 
2,109

Other long-term liabilities
 
1,111

 

Net cash provided by operating activities
 
123,180

 
119,591

Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(2,297
)
 
(1,286
)
Sale of investments
 
7,883

 
7,922

Purchase of investments
 
(12,855
)
 
(7,369
)
Due from broker
 

 
(5,850
)
Acquisitions, net of cash received
 
(2,068
)
 

Proceeds from maturity of investments
 
605

 

Net cash used in investing activities
 
(8,732
)
 
(6,583
)
Cash flows from financing activities:
 
 
 
 
Distributions to noncontrolling interests
 
(80,602
)
 
(80,959
)
Dividends paid on Class A common stock
 
(7,648
)
 
(6,528
)
Payment of capital lease obligations
 
(190
)
 
(138
)
Purchase of Class A units of Manning & Napier Group, LLC
 
(32,401
)
 
(7,413
)
Net cash used in financing activities
 
(120,841
)
 
(95,038
)
Net (decrease) increase in cash and cash equivalents
 
(6,393
)
 
17,970

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
125,250

 
108,324

End of period
 
$
118,857

 
$
126,294

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

Manning & Napier, Inc.
Notes to Consolidated Financial Statements

Note 1—Organization and Nature of the Business
Manning & Napier, Inc. ("Manning & Napier", or the "Company") provides a broad range of investment solutions, as well as a variety of consultative services that complement its investment process. Founded in 1970, the Company offers equity, fixed income and alternative strategies, as well as a range of blended asset portfolios, such as life cycle funds. Headquartered in Fairport, New York, the Company serves a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations.
The Company is the sole managing member of Manning & Napier Group, LLC (together with its subsidiaries, "Manning & Napier Group"), a holding company for the investment management businesses conducted by its operating subsidiaries. The diagram below depicts the Company's organization structure as of September 30, 2014.
  
(1)
The operating subsidiaries of Manning & Napier Group include Manning & Napier Advisors, LLC ("MNA"), Exeter Advisors I, LLC, Manning & Napier Alternative Opportunities, LLC, Perspective Partners LLC, Manning & Napier Information Services, LLC, Manning & Napier Benefits, LLC, Manning & Napier Investor Services, Inc. and Exeter Trust Company.
Note 2—Summary of Significant Accounting Policies
Critical Accounting Policies
There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, these financial statements should be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2013. The financial data for the interim periods may not necessarily be indicative of results for future interim periods or for the full year.
Basis of Presentation

6

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The accompanying unaudited consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial reporting and include all adjustments, consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from these estimates or assumptions.
Principles of Consolidation
As of September 30, 2014, Manning & Napier holds an approximately 14.5% economic interest in Manning & Napier Group but, as managing member, controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statements of financial condition with respect to the remaining economic interest in Manning & Napier Group held by Manning & Napier Group Holdings, LLC (“M&N Group Holdings”) and Manning & Napier Capital Company, LLC (“MNCC”).
All material intercompany transactions have have been eliminated in consolidation.
In accordance with Accounting Standards Codification ("ASU") 2009-17, Consolidation (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). In January 2010, the FASB deferred portions of ASU 2009-17 that relate to certain investment companies. We determined that all entities for which we are investment manager and/or general partner, qualify for the scope deferral and will continue to be assessed for consolidation under prior accounting guidance for consolidation of VIEs.
We provide seed capital to our investment teams to develop new products and services for our clients. Our original seed investment typically represents all or a majority of the equity investment in the new product. We evaluate our seed investments on a regular basis and consolidate such investments as required pursuant to U.S. GAAP.
 MNA serves as the investment adviser for Manning & Napier Fund Inc. series of mutual funds (the “Fund”) and the Exeter Collective Investment Trust (“CIT”). The Fund and CIT are legal entities, the business and affairs of which are managed by their respective boards of directors. As a result, each of these entities is a voting interest entity (“VOE”). While the Company holds, in limited cases, direct investments in a fund (which are made on the same terms as are available to other investors and do not represent a majority voting interest in any fund), the Company does not have a controlling financial interest or a majority voting interest and, as such, does not consolidate these entities.
On May 22, 2014 MNA became the investment advisor of the MN Xenon Managed Futures Offshore Fund, Ltd. ("Offshore Fund") and the General Partner of the MN Xenon Managed Futures Fund LP ("LP Fund") (Note 3). The Offshore Fund is a legal entity that is subject to oversight by its board of directors. Equity holders maintain the right to attend and vote at all general meetings and therefore the voting interest model is applied to determine consolidation. Since the Company does not have any direct investments or control in the Offshore Fund, it does not consolidate this entity.
The Company has determined that the LP Fund is not a VIE as (a) the the entity has enough equity to finance its activities without additional financial support and (b) the limited partners, as a group, have the ability to remove the general partner ("kick-out rights") with a majority vote of partnership percentage. Under the voting interest model, the Company does not consolidate VOEs in which the presumption of control by the general partner is overcome by kick-out rights.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are primarily held in operating accounts at major financial institutions and also in money market securities. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments. The fair value of cash equivalents have been classified as Level 1 in accordance with the fair value hierarchy.
Due from broker
The Company conducts business with brokers for certain of its investment activities. The due from broker balance on the consolidated statements of financial condition represents cash held by brokers as collateral for managed futures and cash at brokers as collateral for securities sold, not yet purchased.

7

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Investment Securities
Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities, and investments in mutual funds for which the Company provides advisory services. Realized and unrealized gains and losses on trading securities are recorded in net gains (losses) on investments in the consolidated statements of operations. Realized gains and losses on sales of trading securities are computed on a specific identification basis. At September 30, 2014, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes.
Securities sold, not yet purchased are recorded on the trade date, are stated at fair value and represent obligations of the Company to purchase the securities at prevailing market rates. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amounts recorded on the consolidated statements of financial condition. The ultimate gains or losses recognized are dependent upon the prices at which these securities are purchased to settle the obligations under the sales commitments. Realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain (loss) from investments on the consolidated statements of operations. Securities sold, not yet purchased are stated at fair value in accrued expenses and other liabilities in the consolidated statements of financial condition, with any unrealized gains or losses reported in current period earnings in net gain (loss) from investments on the consolidated statements of operations.
Operating Segments
The Company operates in one segment, the investment management industry. The Company primarily provides investment management services to separately managed accounts, mutual funds and collective investment trust funds. Management assesses the financial performance of these vehicles on a combined basis.
Revenue
The majority of the Company’s revenues are based on fees charged to manage customers’ portfolios. Investment management fees are generally computed as a percentage of assets under management ("AUM") and recognized as earned. Fees for providing investment advisory services are computed and billed in accordance with the provisions of the applicable investment management agreements. For the Company’s separately managed accounts, clients either pay investment management fees in advance, typically for a semi-annual or quarterly period, or in arrears, typically for a monthly or quarterly period. When investment management fees are paid in advance, the Company defers the revenue and recognizes it over the applicable period. When investment management fees are paid in arrears, the Company estimates revenues based on AUM market values as of the most recent month end date, and adjusts to actual when billed. For mutual funds and collective investment trust vehicles, the Company’s fees are calculated and earned daily based on AUM.
The Company has agreements with third parties who provide distribution and administrative services for its mutual funds, collective investment trusts and certain separately managed accounts. Third party agreements are evaluated against Financial Accounting Standards Board ("FASB") ASC 605-45 Revenue Recognition - Principal Agent Considerations to determine whether revenue should be reported gross or net of payments to third-party service providers. In management's judgment there are various indicators that support gross revenue reporting, the most notable being the Company acts as primary obligor and therefore principal service provider. Based on this evaluation, investment management service revenue is recorded gross of distribution and administrative fees paid to third parties.
Advisory Agreements
The Company derives significant revenue from its role as advisor to the Fund and the CIT.
The Company's investments in the Fund amounted to approximately $1.7 million as of September 30, 2014 and December 31, 2013.
Fees earned for advisory related services provided to the Fund and CIT investment vehicles were approximately $56.5 million and $164.6 million for the three and nine months ended September 30, 2014, respectively, and $50.0 million and $144.8 million for the three and nine months ended September 30, 2013, respectively. These amounts represent greater than 10% of the Company's revenue in each respective period.

8

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)


Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance will be effective on January 1, 2017 and requires either a retrospective or a modified retrospective approach to adoption. Early application is prohibited. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
Note 3—Acquisitions
On May 22, 2014, the Company acquired the operating assets of 2100 Xenon LLC ("Xenon"), an alternative investment manager specializing in managed futures and global macro strategies for institutional and individual clients.
The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805 "Business Combinations." Accordingly, goodwill was measured as the excess of the acquisition-date fair value of the consideration transferred over the amount of acquisition-date identifiable assets acquired net of assumed liabilities. The Company recorded $0.8 million of intangible assets and $0.9 million of goodwill, all of which are deductible for U.S. tax purposes, in other long term assets in the consolidated statement of financial condition. In management's opinion, the goodwill represents the value expected from the synergies created through the integration of Xenon's operations, as well as the reputation and expertise of Xenon in the asset management industry.
The results of operations of Xenon have been included in the Company's results prospectively from the date of acquisition.
Note 4—Noncontrolling Interests
Manning & Napier holds an approximately 14.5% economic interest in Manning & Napier Group, but as managing member controls all of the business and affairs of Manning & Napier Group. As a result, the Company consolidates the financial results of Manning & Napier Group and records a noncontrolling interest on its consolidated statement of financial condition with respect to the remaining approximately 85.5% aggregate economic interest in Manning & Napier Group held by M&N Group Holdings and MNCC. Net income attributable to noncontrolling interests on the statements of operations represents the portion of earnings or loss attributable to the economic interest in Manning & Napier Group held by the noncontrolling interests.
The following provides a reconciliation from “Income before provision for income taxes” to “Net income attributable to Manning & Napier, Inc.”:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Income before provision for income taxes
 
$
22,796

 
$
25,015

 
$
65,611

 
$
64,581

Less: gain (loss) before provision for income taxes of Manning & Napier, Inc. (a)
 
(87
)
 
(270
)
 
2,015

 
(833
)
Income before provision for income taxes, as adjusted
 
22,883

 
25,285

 
63,596

 
65,414

Controlling interest percentage (b)
 
14.5
%
 
13.9
%
 
14.3
%
 
13.9
%
Net income attributable to controlling interest
 
3,318

 
3,526

 
9,086

 
9,100

Plus: gain (loss) before provision for income taxes of Manning & Napier, Inc. (a)
 
(87
)
 
(270
)
 
2,015

 
(833
)
Income before income taxes attributable to Manning & Napier, Inc.
 
3,231

 
3,256

 
11,101

 
8,267

Less: provision for income taxes of Manning & Napier, Inc. (c)
 
2,803

 
1,942

 
9,893

 
6,349

Net income attributable to Manning & Napier, Inc.
 
$
428

 
$
1,314

 
$
1,208

 
$
1,918

________________________
a)
Manning & Napier, Inc. incurs certain gains or expenses that are only attributable to it and are therefore excluded from the net income attributable to noncontrolling interests.

9

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

b)
Income before provision for income taxes is allocated to the controlling interest based on the percentage of units of Manning & Napier Group held by Manning & Napier, Inc. The amount represents the Company's weighted ownership of Manning & Napier Group for the respective periods.
c)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Manning & Napier, Inc. and (ii) the provision for income taxes of Manning & Napier, Inc. which includes all U.S. federal and state income taxes. The consolidated provision for income taxes totaled approximately $3.0 million and $2.2 million for the three months ended September 30, 2014 and 2013, respectively. The consolidated provision for income taxes totaled approximately $10.4 million and $6.8 million for the nine months ended September 30, 2014 and 2013, respectively.
Noncontrolling interests as of and for the nine months ended September 30, 2014 and 2013, included the following amounts:
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
(in thousands)
Balance, beginning of period
 
$
(22,790
)
 
$
(41,115
)
Net income attributable to noncontrolling interests
 
53,991

 
55,864

Distributions to noncontrolling interests
 
(80,602
)
 
(80,959
)
Equity-based compensation
 
58,406

 
54,892

Purchase of Class A units of Manning & Napier Group, LLC held by noncontrolling interests
 
(26,531
)
 
(6,493
)
Balance, end of period
 
$
(17,526
)
 
$
(17,811
)
On March 31, 2014, M&N Group Holdings and MNCC exchanged a total of 2,098,837 Class A units of Manning & Napier Group for approximately $30.3 million in cash. Subsequent to the exchange, the Class A units were retired. In addition, on May 29, 2014, M&N Group Holdings exchanged a total of 187,848 Class A units of Manning & Napier Group. In connection with the exchange, Manning & Napier issued 56,000 shares of Class A common stock and paid approximately $2.1 million in cash for the remaining 131,848 units. The exchange of 187,848 Class A units on May 29, 2014 gave rise to a deferred tax asset of approximately $1.4 million and a corresponding liability of approximately $1.2 million pursuant to the tax receivable agreement ("TRA") which the Company entered into in connection with the Company's 2011 initial public offering ("IPO"). The initial estimate for the deferred tax asset, net of the liability under the TRA is recorded within paid-in capital.
As a result of the aforementioned transactions, the Company's economic ownership interest in Manning & Napier Group increased to 14.5%. As of September 30, 2014, M&N Group Holdings and MNCC may exchange an aggregate of 73,574,338 units of Manning & Napier Group for shares of the Company's Class A common stock pursuant to the terms of the exchange agreement entered into at the time of the Company's 2011 IPO.
During the nine months ended September 30, 2014 and 2013, the Company distributed approximately $80.6 million and $81.0 million, respectively, to noncontrolling interests. None of these distributions are payments pursuant to the TRA.
At September 30, 2014 and December 31, 2013, the Company had recorded a liability of $41.2 million and $44.0 million, respectively, representing the estimated payments due to the selling unit holders under the TRA. Of these amounts, $2.1 million and $2.0 million were included in accrued expenses and other liabilities at September 30, 2014 and December 31, 2013, respectively. The Company made payments pursuant to the TRA of $2.0 million during the nine months ended September 30, 2014 and 2013. The Company recorded an adjustment of $2.0 million to the amounts payable under the TRA during the nine months ended September 30, 2014, driven primarily by enacted changes in tax laws.
Obligations pursuant to the TRA are obligations of Manning & Napier. They do not impact the noncontrolling interests. These obligations are not income tax obligations. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company’s net income.
Note 5—Investment Securities

10

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following table represents the Company’s investment securities holdings as of September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 10/31/2015)
 
$
2,107

 
$

 
$

 
$
2,107

 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
12,055

Fixed income securities
 
 
 
 
 
 
 
9,911

Managed mutual funds
 
 
 
 
 
 
 
1,709

 
 
 
 
 
 
 
 
23,675

Total investment securities
 
 
 
 
 
 
 
$
25,782

 
 
December 31, 2013
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
(in thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Treasury note (0.25%, 8/31/2014)
 
$
505

 
$

 
$

 
$
505

U.S. Treasury note (1.75%, 1/31/2014)
 
102

 

 

 
102

 
 
607

 

 

 
607

Trading securities
 
 
 
 
 
 
 
 
Equity securities
 
11,961

Fixed income securities
 
7,085

Managed mutual funds
 
1,668

 
 
 
 
 
 
 
 
20,714

Total investment securities
 
 
 
 
 
 
 
$
21,321

Investment securities are classified as either trading or available-for-sale and are carried at fair value. Fair value is determined based on quoted market prices in active markets for identical or similar instruments.
Investment securities classified as trading consist of equity securities, fixed income securities and investments in mutual funds for which the Company provides advisory services. At September 30, 2014 and December 31, 2013, trading securities consist solely of investments held by the Company to provide initial cash seeding for product development purposes. The Company recognized approximately $0.9 million of net unrealized losses and $0.5 million of net unrealized gains related to investments classified as trading during the nine months ended September 30, 2014 and 2013, respectively.
Investment securities classified as available-for-sale consist of U.S. Treasury notes for compliance with certain regulatory requirements. As of September 30, 2014 and December 31, 2013, $0.6 million of these securities is considered restricted. The Company periodically reviews each individual security position that has an unrealized loss, or impairment, to determine if that impairment is other-than-temporary. No other-than-temporary impairment charges have been recognized by the Company during the nine months ended September 30, 2014 and 2013.
Note 6—Derivative Instruments
The Company enters into futures contracts for product development purposes. Futures are commitments either to purchase or sell a designated financial instrument, currency, commodity or an index at a specified future date for a specified price and may be settled in cash or another financial asset. Upon entering into a futures contract, the Company is required to pledge to the broker an amount of cash, which is reported in due from broker within the consolidated statements of financial condition. Futures contracts have little credit risk because the counterparties are futures exchanges. The Company does not hold any derivatives in a formal hedge relationship under ASC 815-10, Derivatives and Hedging.

11

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following tables present the notional value and fair value as of September 30, 2014 and December 31, 2013 for derivative instruments not designated as hedging instruments:

 
 
September 30, 2014
 
 
 
 
Fair Value
 
 
Notional Value
 
Asset Derivative
 
Liability Derivative
 
 
(in thousands)
Interest rate futures
 
$
126,640

 
$
71

 
$
(72
)
Index futures
 
2,942

 

 
(58
)
Commodity futures
 
2,686

 
49

 
(82
)
Currency futures
 
6,455

 
56

 
(51
)
Total derivatives
 
$
138,723

 
$
176

 
$
(263
)
 
 
December 31, 2013
 
 
 
 
Fair Value
 
 
Notional Value
 
Asset Derivative
 
Liability Derivative
 
 
(in thousands)
Interest rate futures
 
$
123,164

 
$
217

 
$
(66
)
Total derivatives
 
$
123,164

 
$
217

 
$
(66
)
As of September 30, 2014 and December 31, 2013, the derivative assets and liabilities are measured at fair value and are included in due from broker in the consolidated statements of financial condition, with changes in the fair value reported in net gains (losses) on investments in the consolidated statements of operations. For the nine months ended September 30, 2014, the average volume of derivative activity (measured in terms of notional value) was approximately $130.1 million. The following table presents the gains (losses) recognized in net gains (losses) on investments in the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013:    
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Interest rate futures
$
12

 
$
(13
)
 
$
(544
)
 
$
(13
)
Index futures
(54
)
 

 
15

 

Commodity futures
50

 

 
(10
)
 

Currency futures
(58
)
 

 
(23
)
 

Balance as of end of period
$
(50
)
 
$
(13
)
 
$
(562
)
 
$
(13
)
The Company discloses information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position in accordance with ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The derivatives instruments are subject to a master netting agreement allowing for the netting of assets and liabilities on the consolidated statements of financial position.

The following table presents the offsetting of interest rate futures as of September 30, 2014 and December 31, 2013:
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets (Liabilities) Presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
 
 
(in thousands)
September 30, 2014
 
$
(263
)
 
$
176

 
$
(87
)
 
$

 
$
(87
)
 
$

December 31, 2013
 
$
(66
)
 
$
217

 
$
151

 
$

 
$

 
$
151

Note 7—Fair Value Measurements

12

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Fair value is defined as the price that the Company would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1—observable inputs such as quoted prices in active markets for identical securities;
Level 2—other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3—significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The following provides the hierarchy of inputs used to derive the fair value of the Company’s financial instruments as of September 30, 2014 and December 31, 2013: 
 
 
September 30, 2014
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
12,055

 
$

 
$

 
$
12,055

Fixed income securities
 
1,214

 
8,697

 

 
9,911

Managed mutual funds
 
1,709

 

 

 
1,709

U.S. Treasury notes
 

 
2,107

 

 
2,107

Derivatives
 
176

 

 

 
176

Total assets at fair value
 
$
15,154

 
$
10,804

 
$

 
$
25,958

 
 
 
 
 
 
 
 
 
Securities sold, not yet purchased
 
$
1,063

 
$

 
$

 
$
1,063

Derivatives
 
263

 

 

 
263

Total liabilities at fair value
 
$
1,326

 
$

 
$

 
$
1,326

 
 
December 31, 2013
 
 
Level 1
 
Level 2
 
Level 3
 
Totals
 
 
(in thousands)
Equity securities
 
$
11,961

 
$

 
$

 
$
11,961

Fixed income securities
 
1,220

 
5,865

 

 
7,085

Managed mutual funds
 
1,668

 

 

 
1,668

U.S. Treasury notes
 

 
607

 

 
607

Derivatives
 
217

 

 

 
217

Total assets at fair value
 
$
15,066

 
$
6,472

 
$

 
$
21,538

 
 
 
 
 
 
 
 
 
Securities sold, not yet purchased
 
$
777

 
$

 
$

 
$
777

Derivatives
 
66

 

 

 
66

Total liabilities at fair value
 
$
843

 
$

 
$

 
$
843


Valuations of investments in fixed income securities and U.S. Treasury notes can generally be obtained through independent pricing services. For most bond types, the pricing service utilizes matrix pricing, which considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type and current day trade information, as well as dealer supplied prices. These valuations are categorized as Level 2 in the hierarchy.
There were no Level 3 securities held by the Company at September 30, 2014 or December 31, 2013.

13

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The Company’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1 and Level 2 securities during the nine months ended September 30, 2014.
Note 8—Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:
 
 
September 30, 2014
 
December 31, 2013
 
 
(in thousands)
Accrued bonus and sales commissions
 
$
21,323

 
$
28,305

Accrued payroll and benefits
 
2,817

 
2,970

Accrued sub-transfer agent fees
 
9,476

 
8,081

Dividends payable
 
2,193

 
3,272

Amounts payable under tax receivable agreement
 
2,091

 
1,955

Securities sold, not yet purchased
 
1,063

 
777

Other accruals and liabilities
 
4,766

 
4,453

 
 
$
43,729

 
$
49,813

Note 9—Line of Credit
On February 13, 2013, the Company and Manning & Napier Group executed a Daily Adjusting LIBOR Revolving Line Note (the "Note") with M&T Bank. The Note has an original principal amount of $10.0 million and bears an interest rate of 1.50 percentage points above the greater of (a) one-month LIBOR, adjusting daily, or (b) one-day (i.e., overnight) LIBOR. The Note is unsecured and is payable on demand. If the Company fails to make payment when due under the Note, the default rate on the outstanding balance shall be 5 percentage points per year above the otherwise applicable rate per year. The Company has not drawn any loans under the Note.
Note 10—Commitments and Contingencies
The Company may from time to time enter into agreements that contain certain representations and warranties and which provide general indemnifications. The Company may also serve as a guarantor of such obligations of one or more of the Manning & Napier Group entities. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects any risk of liability associated with such guarantees to be remote.
Regulation
As an investment adviser to a variety of investment products, the Company and its affiliated broker-dealer are subject to routine reviews and inspections by the SEC, Financial Industry Regulatory Authority, Inc., National Futures Association and U.S. Commodity Futures Trading Commission. From time to time, the Company may also be subject to claims, be involved in various legal proceedings arising in the ordinary course of its business and be subject to other contingencies. The Company does not believe that the outcome of any of these reviews, inspections or other legal proceedings will have a material impact on its consolidated financial statements; however, litigation is subject to many uncertainties, and the outcome of individual litigated matters is difficult to predict. The Company will establish accruals for matters that are probable, can be reasonably estimated, and may take into account any related insurance recoveries to the extent of such recoveries. Currently, there are no legal proceedings pending or, to the Company’s knowledge, threatened against it. As of September 30, 2014 and December 31, 2013, the Company has not accrued for any such claims, legal proceedings, or other contingencies.
Note 11—Earnings per Common Share
Basic earnings per share (“basic EPS”) is computed by dividing net income by the weighted average number of shares outstanding for the reporting period. Diluted earnings per share (“diluted EPS”) gives effect during the reporting period to other potentially dilutive shares outstanding. 

14

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2014 and 2013:
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands, except share data)
Net income attributable to controlling and noncontrolling interests
 
$
19,820

 
$
22,793

 
$
55,199

 
$
57,782

Less: net income attributable to noncontrolling interests
 
19,392

 
21,479

 
53,991

 
55,864

Net income attributable to Manning & Napier, Inc.
 
$
428

 
$
1,314

 
$
1,208

 
$
1,918

 
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
 
13,705,134

 
13,634,246

 
13,669,391

 
13,612,289

Dilutive effect from restricted stock units
 
224,886

 
56,395

 
153,011

 
61,210

Weighted average shares of Class A common stock outstanding - diluted
 
13,930,020

 
13,690,641

 
13,822,402

 
13,673,499

Net income available to Class A common stock per share - basic
 
$
0.03

 
$
0.10

 
$
0.09

 
$
0.14

Net income available to Class A common stock per share - diluted
 
$
0.03

 
$
0.10

 
$
0.09

 
$
0.14

For the nine months ended September 30, 2014, a total of 282,247 shares of Class A common stock issuable upon the assumed conversion of restricted stock units were excluded from the calculation of diluted net income available to Class A common stock per share, as the effect of including these shares for the respective periods would have been anti-dilutive.
In addition, for the three and nine months ended September 30, 2014, a total of 181,378 shares of Class A common stock issuable upon the assumed conversion of restricted stock units were excluded from the calculation of diluted net income available to Class A common stock per share, as the performance conditions of these awards were not satisfied as of September 30, 2014.
At September 30, 2014 there were 73,574,338 Class A Units of Manning & Napier Group outstanding which, subject to certain restrictions, may be exchangeable for up to 73,574,338 shares of the Company’s Class A common stock. The restrictions set forth in the exchange agreement were in place at the end of the current reporting period. As such, these units were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2014.
The Company’s Class B common stock represent voting interests and do not participate in the earnings of the Company. Accordingly, there is no basic or diluted EPS related to the Company’s Class B common stock.

15

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

Note 12—Equity Based Compensation
2011 Equity Compensation Plan
During the nine months ended September 30, 2014, 534,798 equity awards were issued under the 2011 Equity Compensation Plan (the "2011 Plan"). Of these awards, 56,000 related to the redemption of previously issued and outstanding Class A units of Manning & Napier Group that were granted prior to the initial public offering, which were subsequently re-issued as Class A common stock. The remaining 478,798 represent newly issued awards, consisting of 15,173 shares of Class A common stock and 463,625 restricted stock units. The Class A common stock awards vested immediately, and 282,247 of the restricted stock units will vest on the third anniversary of the grant date. The remaining 181,378 of the restricted stock units will vest over a three-year service period, subject to achievement of certain revenue objectives. As such, these awards are considered to have a performance condition and the Company will periodically assess which outcomes are probable of achievement to ensure that compensation cost recognized for these awards reflects the number of awards that are ultimately expected to vest.
The following table summarizes stock award activity for the nine months ended September 30, 2014 under the 2011 Plan:
 
 
Restricted
Stock Awards
 
Weighted Average Grant Date Fair Value
Stock awards outstanding at January 1, 2014
 
416,917

 
$
15.63

Granted
 
534,798

 
$
15.29

Vested
 
(71,173
)
 
$
16.66

Forfeited
 
(12,780
)
 
$
15.60

Stock awards outstanding at September 30, 2014
 
867,762

 
$
15.34

The weighted average grant date fair value of 2011 Plan awards granted during the nine months ended September 30, 2014 and 2013 was $15.29 and $15.83, respectively, based on the closing sale price of Manning & Napier Inc.'s Class A common stock as reported on the New York Stock Exchange on the date of grant, and reduced by the present value of the dividends expected to be paid on the underlying shares during the requisite service period. For such awards that vest over time, recipients are not entitled to dividends declared on the underlying shares of Class A common stock until the awards vest.
For the three and nine months ended September 30, 2014, the Company recorded approximately $0.9 million and $2.2 million of compensation expense related to awards granted under the 2011 Plan. For the three and nine months ended September 30, 2013, the Company recorded approximately $0.6 million and $1.1 million of compensation expense related to awards under the 2011 Plan. 
The aggregate intrinsic value of 2011 Plan awards that vested during the nine months ended September 30, 2014 was approximately $1.2 million. As of September 30, 2014, there was unrecognized compensation expense related to 2011 Plan awards of approximately $7.0 million, which the Company expects to recognize over a weighted average period of approximately 2.1 years.
Reorganization-Related Equity Based Compensation
The following table summarizes service-based stock unit activity for the nine months ended September 30, 2014 specific to the 2011 reorganization transactions:
 
 
Service-Based
Stock Units
 
Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 2014
 
1,458,049

 
$
12.00

Granted
 

 
$

Vested
 

 
$

Forfeited
 

 
$

Stock unit awards outstanding at September 30, 2014
 
1,458,049

 
$
12.00

In addition to the service-based stock unit activity above, during 2014 the Company also commenced recognition of compensation expense for approximately 4.1 million performance-based awards eligible to vest on December 31, 2014 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. Vesting of these performance-based awards is contingent upon the satisfaction of annual performance criteria specific to each award recipient. The determination of whether an award recipient has met such performance criteria will be made at the end of the annual service period. In accordance with Accounting Standards Codification Topic 718, Stock Compensation, the grant date for these performance-based awards will occur at the end of the service period. Until the grant date, compensation expense will be re-

16

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

measured at the end of each reporting period, to the extent that service has been rendered in proportion to the total requisite service period.
The following table summarizes performance-based stock unit activity for the nine months ended September 30, 2014 specific to the 2011 reorganization transactions:
 
 
Performance-Based
Stock Units
 
Weighted Average Grant Date Fair Value
Stock unit awards outstanding at January 1, 2014
 

 
$

Granted
 
37,577

 
$
16.78

Vested
 
(37,577
)
 
$
16.78

Forfeited
 

 
$

Stock unit awards outstanding at September 30, 2014
 

 
$

For the three and nine months ended September 30, 2014, the Company recorded approximately $20.8 million and $66.0 million of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three and nine months ended September 30, 2014, approximately $4.5 million and $13.4 million is attributable to the service-based awards. For the same periods, the remaining expense of approximately $16.3 million and $52.5 million is attributable to performance-based awards. For the three and nine months ended September 30, 2014, $16.3 million and $51.9 million of the expense attributable to performance-based awards is related to awards eligible to vest on December 31, 2014 under the vesting terms of ownership interests in connection with the 2011 reorganization transactions. As discussed above, this expense is based upon the closing sale price of Manning & Napier Inc.’s Class A common stock as reported on the New York Stock Exchange on September 30, 2014.
For the three and nine months ended September 30, 2013, the Company recognized a total of approximately $18.2 million and $62.7 million, respectively, of compensation expense related to the vesting terms of ownership interests in connection with the 2011 reorganization transactions. For the three and nine months ended September 30, 2013, approximately $4.5 million and $15.1 million, respectively, was attributable to the service-based awards. For the same periods, the remaining expense of approximately $13.7 million and $47.5 million, respectively, was attributable to performance-based awards.
As of September 30, 2014, there was unrecognized compensation expense related to unvested service-based awards of approximately $2.2 million. The Company expects to recognize this expense over a weighted average period of 0.1 years.
As of September 30, 2014, there was unrecognized compensation expense related to unvested performance-based awards of approximately $17.3 million, which the Company expects to recognize over a weighted average period of 0.3 years. This estimate is based upon the closing sale price of Manning & Napier, Inc.’s Class A common stock as reported on September 30, 2014.
Note 13—Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a “C-Corporation". As such, the entities functioning as LLC’s are not liable for or able to benefit from U.S. federal and most state income taxes on their earnings, and earnings (losses) will be included in the personal income tax returns of each entity’s unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
The Company’s income tax provision and effective tax rate were as follows: 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in thousands)
Earnings from continuing operations before income taxes
 
$
22,796

 
$
25,015

 
$
65,611

 
$
64,581

Effective tax rate
 
13.1
%
 
8.9
%
 
15.9
%
 
10.5
%
Provision for income taxes
 
2,976

 
2,222

 
10,412

 
6,799

Provision for income taxes @ 35%
 
7,979

 
8,755

 
22,964

 
22,603

Difference between tax at effective vs. statutory rate
 
$
(5,003
)
 
$
(6,533
)
 
$
(12,552
)
 
$
(15,804
)
For the three and nine months ended September 30, 2014 and 2013, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35% is primarily attributable to the benefit resulting from the fact that a significant portion of the Company’s operations include a series of flow-through entities which are generally not subject to federal and most state income taxes. Accordingly, a portion of the Company’s earnings are

17

Manning & Napier, Inc.
Notes to Consolidated Financial Statements (Continued)

not subject to corporate level taxes. For the nine months ended September 30, 2014, the benefit is partially offset by the impact of a reduction to the Company's deferred tax asset as a result of enacted changes in tax laws during the first quarter of 2014, which reduced expected tax benefits.
Note 14—Related Party Transactions
Transactions with noncontrolling members
From time to time, the Company may be asked to provide certain services, including accounting, legal and other administrative functions for the noncontrolling members of Manning & Napier Group. While immaterial, the Company has not received any reimbursement for such services.
The Company manages the personal funds of certain of the Company's executive officers, including William Manning. Pursuant to the respective investment management agreements, in some instances the Company waives or reduces its regular advisory fees for these accounts and personal funds utilized to incubate products. The aggregate value of the fees waived for the nine months ended September 30, 2014 related to the Company's executive officers was approximately $0.1 million.
Affiliate transactions - Manning & Napier Fund, Inc.
The Company has agreements to serve as the investment manager of Manning & Napier Fund, Inc., with which certain of its officers are affiliated. Under the terms of these agreements, which are generally reviewed and continued by the board of directors of Manning & Napier Fund, Inc. annually, the Company receives a fee based on an annual percentage of the average daily net assets of each series within the Manning & Napier Fund, Inc. The Company has contractually agreed to limit its fees and reimburse expenses to limit operating expenses incurred by certain of Manning & Napier Fund, Inc. series.
Note 15—Subsequent Events
Distributions and dividends
On October 29, 2014, the Board of Directors approved a distribution from Manning & Napier Group to Manning & Napier and the noncontrolling interests of Manning & Napier Group. The amount of the distribution to the members of Manning & Napier Group is approximately $46.3 million, of which approximately $39.6 million is expected to be payable to the noncontrolling interests. Concurrently, the Board of Directors declared a $0.24 per share dividend to the holders of Class A common stock. The dividend is payable on or about February 2, 2015 to shareholders of record as of January 15, 2015.

18

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "could," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the “Risk Factors” section, as well as other sections, of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Business
We are an independent investment management firm that provides a broad range of investment solutions, as well as a variety of consultative services that complement our investment process. Founded in 1970, we offer equity, fixed income, and alternative strategies, as well as a range of blended asset portfolios, such as life cycle funds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts—including those offered by the Manning & Napier Fund, Inc. (the "Fund") and Exeter Trust Company.
Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel, where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios.
Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of mutual fund equity portfolios.
Our assets under management (“AUM”) was $51.1 billion as of September 30, 2014. The composition of our AUM by vehicle and portfolio is illustrated in the table below.
 
 
September 30, 2014
AUM - by investment vehicle and portfolio
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Separately managed accounts
 
$
13,438.7

 
$
11,780.4

 
$
1,214.5

 
$
26,433.6

Mutual funds and collective investment trusts
 
11,898.5

 
12,753.0

 
38.3

 
24,689.8

Total
 
$
25,337.2

 
$
24,533.4

 
$
1,252.8

 
$
51,123.4


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The composition of our separately managed accounts as of September 30, 2014, by channel and portfolio, is set forth in the table below. 
 
 
September 30, 2014
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(dollars in millions)
Separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
$
9,604.7

 
$
8,505.7

 
$
1,039.7

 
$
19,150.1

Intermediary Channel
 
3,830.6

 
991.9

 
174.8

 
4,997.3

Platform/Sub-advisor Channel
 
3.4

 
2,282.8

 

 
2,286.2

Total
 
$
13,438.7

 
$
11,780.4

 
$
1,214.5

 
$
26,433.6

Percentage of separate account AUM
 
 
 
 
 
 
 
 
Direct Channel
 
36
%
 
32
%
 
4
%
 
72
%
Intermediary Channel
 
14
%
 
4
%
 
1
%
 
19
%
Platform/Sub-advisor Channel
 

 
9
%
 

 
9
%
Total
 
50
%
 
45
%
 
5
%
 
100
%
Percentage of portfolio by channel
 
 
 
 
 
 
 
 
Direct Channel
 
71
%
 
73
%
 
86
%
 
72
%
Intermediary Channel
 
29
%
 
8
%
 
14
%
 
19
%
Platform/Sub-advisor Channel
 

 
19
%
 
%
 
9
%
Total
 
100
%
 
100
%
 
100
%
 
100
%
Percentage of channel by portfolio
 
 
 
 
 
 
 
 
Direct Channel
 
50
%
 
44
%
 
6
%
 
100
%
Intermediary Channel
 
77
%
 
20
%
 
3
%
 
100
%
Platform/Sub-advisor Channel
 

 
100
%
 
%
 
100
%
Our separate accounts contributed 35% of our total gross client inflows for the nine months ended September 30, 2014 and represented 52% of our total AUM as of September 30, 2014.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 56% of the total gross client inflows for our separate account business for the nine months ended September 30, 2014 and represented 72% of our total separate account AUM as of September 30, 2014. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Direct Channel’s high net worth and middle market institutional client-type focus.
During the nine months ended September 30, 2014, blended asset and equity portfolios represented 47% and 36%, respectively, of the separate account gross client inflows from the Direct Channel, while fixed income portfolios accounted for 17%. As of September 30, 2014, blended asset and equity portfolios represented 50% and 44%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 6%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client’s specific investment objectives. Historically, relationships with larger institutions have been a driver of growth in separately managed account equity strategies. Going forward, we expect many of these larger institutions may seek exposure to non-U.S. equity strategies through commingled vehicles to limit related custody expenses rather than separately managed accounts, and our U.S.-based equity strategies may continue to be attractive to large institutions in a separate account format.
To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the nine months ended September 30, 2014, 16% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 28% came from registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 28% of our total separate account AUM as of September 30, 2014.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors’ needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the nine months ended September 30, 2014, blended asset and equity portfolios represented

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76% and 22%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income portfolios represented 2%. As of September 30, 2014, 77% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 20% allocated to equity and 3% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio for their clients.
In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the nine months ended September 30, 2014, 98% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios and 2% were into fixed income.
Our annualized separate account retention rate across all channels was approximately 93% during the nine months ended September 30, 2014, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
During the nine months ended September 30, 2014, market appreciation for our separate account AUM was 3.2%, including 4.6% in our blended assets and 1.9% in equity portfolios.
The composition of our mutual fund and collective investment trust AUM as of September 30, 2014, by portfolio, is set forth in the table below. 
 
 
September 30, 2014
 
 
Blended
Asset
 
Equity
 
Fixed Income
 
Total
 
 
(in millions)
Mutual fund and collective investment trust AUM
 
$
11,898.5

 
$
12,753.0

 
$
38.3

 
$
24,689.8

Our mutual funds and collective investment trusts contributed 65% of our total gross client inflows for the nine months ended September 30, 2014 and represented 48% of our total AUM as of September 30, 2014. As of September 30, 2014, our mutual fund and collective investment trust AUM consisted of 48% from blended asset portfolios and 52% from equity portfolios. During the nine months ended September 30, 2014, 55% and 44% of the gross client inflows were attributable to blended assets and equity portfolios, respectively. For the nine months ended September 30, 2014, market appreciation for our mutual fund and collective investment trust AUM was flat, including 4.4% in our blended assets, offset by a decrease of 3.7% in our equity portfolios.
Our mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers and retirement plan advisors. Through our Intermediary Channel, we are increasingly focused on our blended asset life cycle fund vehicles given our emphasis on advisors that work with retirement plans. Our blended asset portfolios are also used by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel is anticipated to increase due to national brokerage firm representatives who wish to use our mutual funds as a component of a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms’ approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 285 dealer relationships. These relationships are important to the expansion of our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity portfolios, in particular our non-U.S. portfolios, to large institutional clients with which we have direct relationships, and often the client’s consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to be focused on distributing blended asset and equity portfolio funds, particularly as the breadth of our mutual fund and collective investment trust offerings expands.
Results of Operations
Below is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2014 and 2013.


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Key Components of Results of Operations
Overview
Changes to our operating results over time are largely driven by net client asset flows and changes to the market value of our AUM. In addition, beginning in the quarter ended June 30, 2014, the line item "market appreciation/(depreciation) and other" within our AUM tables throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes investment gains/(losses) on assets under management and net flows from non-sales related activities including asset acquisitions.
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum.
Other components impacting our operating results include:
asset-based fee rates and changes in those rates;
the composition of our AUM among various portfolios, vehicles and client types;
changes in our variable costs, including incentive compensation and distribution, servicing and custody expenses, which are affected by our investment performance, level of our AUM and revenue; and
fixed costs, including changes to base compensation, vendor-related costs and investment spending on new products.

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Assets Under Management
The following tables reflect the indicated components of our AUM for our investment vehicles for the three and nine months ended September 30, 2014 and 2013.
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
As of June 30, 2014
 
$
27,621.6

 
$
26,457.0

 
$
54,078.6

 
51
%
 
49
%
 
100
%
Gross client inflows
 
828.9

 
1,385.5

 
2,214.4

 
 
 
 
 
 
Gross client outflows
 
(979.5
)
 
(1,590.4
)
 
(2,569.9
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
(1,037.4
)
 
(1,562.3
)
 
(2,599.7
)
 
 
 
 
 
 
As of September 30, 2014
 
$
26,433.6

 
$
24,689.8

 
$
51,123.4

 
52
%
 
48
%
 
100
%
Average AUM for period
 
$
27,164.9

 
$
25,811.1

 
$
52,976.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2013
 
$
24,791.5

 
$
21,526.2

 
$
46,317.7

 
54
%
 
46
%
 
100
%
Gross client inflows
 
484.9

 
1,414.8

 
1,899.7

 
 
 
 
 
 
Gross client outflows
 
(1,036.5
)
 
(1,271.8
)
 
(2,308.3
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
1,583.7

 
1,622.1

 
3,205.8

 
 
 
 
 
 
As of September 30, 2013
 
$
25,823.6

 
$
23,291.3

 
$
49,114.9

 
53
%
 
47
%
 
100
%
Average AUM for period
 
$
25,362.0

 
$
22,634.3

 
$
47,996.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
Separately
managed
accounts
 
Mutual funds
and collective
investment
trusts
 
Total
 
 
 

 
(in millions)
 
 

 
 
 
 
 
 
As of December 31, 2013
 
$
26,835.0

 
$
23,991.2

 
$
50,826.2

 
53
%
 
47
%
 
100
%
Gross client inflows
 
2,480.2

 
4,680.9

 
7,161.1

 
 
 
 
 
 
Gross client outflows
 
(3,817.2
)
 
(3,973.4
)
 
(7,790.6
)
 
 
 
 
 
 
Market appreciation/(depreciation) & other
 
935.6

 
(8.9
)
 
926.7

 
 
 
 
 
 
As of September 30, 2014
 
$
26,433.6

 
$
24,689.8

 
$
51,123.4

 
52
%
 
48
%
 
100
%
Average AUM for period
 
$
27,107.5

 
$
25,236.1

 
$
52,343.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
$
24,683.6

 
$
20,525.3

 
$
45,208.9

 
55
%
 
45
%
 
100
%
Gross client inflows
 
1,939.8

 
4,564.0

 
6,503.8

 
 
 
 
 
 
Gross client outflows
 
(3,999.5
)
 
(4,369.5
)
 
(8,369.0
)
 
 
 
 
 
 
Market appreciation (depreciation)
 
3,199.7

 
2,571.5

 
5,771.2

 
 
 
 
 
 
As of September 30, 2013
 
$
25,823.6

 
$
23,291.3

 
$
49,114.9

 
53
%
 
47
%
 
100
%
Average AUM for period
 
$
25,684.1

 
$
22,014.3

 
$
47,698.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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The following tables reflect the indicated components of our AUM for our portfolios for the three and nine months ended September 30, 2014 and 2013.
 
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
Blended
Asset
 
Equity
 
Fixed
Income
 
Total
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2014
 
$
25,891.6

 
$
26,968.0

 
$
1,219.0

 
$
54,078.6

 
48
%
 
50
%
 
2
%
 
100
%
Gross client inflows
 
1,208.0

 
858.3

 
148.1

 
2,214.4